Fitch Affirms Regal Ratings at 'B+'; Outlook Stable

February 09, 2012 11:35 AM Eastern Standard Time

NEW YORK--(BUSINESS WIRE)--Fitch Ratings has affirmed the 'B+' issuer default rating (IDR) of Regal
Entertainment Group (Regal) and Regal Cinemas Corporation (Regal
Cinemas). The Outlook is Stable. Please see a full list of ratings at
the end of the release.

The ratings and Stable Outlook reflect the following considerations:

--The ratings are supported by the company's size and position as the
largest domestic movie exhibitor, with 528 theaters and 6,605 screens.

--Fitch believes movie exhibition will continue to be a key promotion
window for the movie studios' biggest/most profitable releases.

--Fitch expects that attendance and box office revenues should be
supported by the upcoming healthy film slate for 2012. The 2012 film
slate includes some highly anticipated movies such as The Avengers, The
Dark Knight Rises, Spider-Man, the Hobbit Part 1, and the next
installment of the Twilight series.

--High-margin concession revenues have declined due to reduced
attendance; however, concession revenue per attendee has remained
stable. While Fitch does not anticipate a significant decline in
concession per patron, Fitch remains cautious that high-margin
concessions (which represent 26% of Regal's total revenues and carry 87%
gross margins), may be vulnerable to reduced per-guest concession
spending due to economic cyclical factors or a re-acceleration of
commodity prices.

--The ratings factor in the intermediate/long-term risks associated with
increased competition from at-home entertainment media, limited control
over revenue trends, the pressure on film distribution windows,
increasing indirect competition from other distribution channels (such
as VOD, the Internet and DVD), and high operating leverage (which could
make theater operators free cash flow negative during periods of reduced
attendance).

--For the long term, Fitch continues to expect that the movie exhibitor
industry will be challenged in growing attendance and any potential
attendance declines will offset some of the growth in average ticket
prices.

--In addition, Regal and its peers rely on the quality, quantity, and
timing of movie product, all factors out of management's control.

Rating Drivers:

--Fitch anticipates that Regal, and other movie exhibitors, will
continue to consolidate. While not anticipated, a material debt-funded
acquisition or return of capital to shareholders that would raise the
unadjusted gross leverage beyond 4.5x could have a negative impact on
the rating. In addition, meaningful, sustained declines in attendance
and/or per-guest concession spending, which drove leverage beyond 4.5x,
may pressure the rating as well.

--Fitch heavily weighs the prospective challenges facing Regal and its
industry peers in arriving at the long-term credit ratings. Significant
improvements in the operating environment (sustainable increases in
attendance) and sustained deleveraging could have a positive effect on
the rating, though Fitch views this as unlikely.

2012 Growth Expectations

Regal demonstrated its ability to manage costs and maintain EBITDA
margins of 17% for the last twelve months ended September 2011, despite
attendance declines. Fitch believes that attendance could grow in the
low single digits in 2012, driving revenue growth in the mid single
digits and EBITDA growth in the mid to high single digits.

Liquidity

As of Sept. 29, 2011, liquidity consisted of $179 million in cash and
$82 million of availability (reduced by $3 million in letters of
credit), under Regal Cinemas $85 million revolving credit facility due
May 2015. There are no significant maturities until 2017 when the term
loan facility comes due.

Fitch calculated free cash flow (FCF) for latest 12 months ended
September 2011 was a negative $62.1 million (including an extraordinary
dividend declared in Q4 2010 of $216 million). Fitch expects 2012 FCF,
before any extraordinary dividends, to be in the range of $125 to $175
million. The company does not have any pension obligations.

Leverage

As of Sept. 29, 2011, gross debt totaled $1.9 billion and was made up of
Regal Cinemas' $1 billion secured term loans (due 2017) and $400 million
unsecured notes (due 2019) and Regal's $525 million unsecured notes (due
2018). Fitch calculates Regal's consolidated lease adjusted gross
leverage at 5.2x and unadjusted gross leverage at 4.4x. Fitch expects
unadjusted gross leverage to gradually decline over the next few years,
but remain above 3.75x.

Recovery

Regal's Recovery Ratings reflect Fitch's expectation that the enterprise
value of the company and, hence, recovery rates for its creditors, will
be maximized in a restructuring scenario (as a going concern) rather
than a liquidation. Fitch estimates a distressed enterprise valuation of
$1.8 billion, using a 5x multiple and including an estimate for Regal's
20% stake in National CineMedia, LLC of approximately $180 million.
Based on this enterprise valuation, which is before any administrative
claims, overall recovery relative to total current debt outstanding is
approximately 90%.

The 'RR1' Recovery Rating for the company's credit facilities reflects
Fitch's belief that 91% -- 100% expected recovery is reasonable. While
Fitch does not assign Recovery Ratings for the company's operating lease
obligations, it is assumed the company rejects only 30% of its remaining
$3.4 billion in operating lease commitments due to their significance to
the operations in a going-concern scenario and is liable for 15% of
those rejected values (at a net present value). While Fitch's recovery
analysis shows the potential for full recovery for Regal Cinemas' senior
unsecured notes (equal in ranking to the rejected operating leases),
Fitch's criteria caps the Recovery Ratings for senior unsecured debt at
'RR2'. The 'RR6' assigned to Regal's senior unsecured notes reflects the
structural subordination of the notes and Fitch's expectation for
nominal recovery.

Fitch has affirmed the following ratings:

Regal

--Issuer Default Rating (IDR) at 'B+';

--Senior unsecured notes at 'B-/RR6'.

Regal Cinemas

--IDR at 'B+';

--Senior secured credit facility at 'BB+/RR1';

--Senior unsecured notes at 'BB/RR2'.

The Rating Outlook is Stable.

Additional information is available at 'www.fitchratings.com'.
The ratings above were unsolicited and have been provided by Fitch as a
service to investors.

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